Double Nelp gas price to $8, says Rangarajan

Industry sources said gas producers like Reliance are not happy with the proposal as it apparently does not reflect risks involved in exploration. Producers have been asking for market-linked pricing and the suggested exclusion of transportation and liquefaction costs from the global price to arrive at the benchmark Indian arm's length price clearly did not satisfy them. These two roughly work out to about $4. "Most of the global gas majors have been producing from the same fields for quite some time and have already taken out their risk capital. Therefore, adoption of global average price exclusive of these costs is not desirable," said an oil industry executive, who asked not to be named.

The panel which studies the design of oil and gas contracts said future contracts should provide for a fixed matrix of what revenue to be shared with the government at a particular output and price without any regard for whether the company has recovered its investments or not.

That is, the government's share should go up as production and price go up, without any reference to the investments made or recovered by the company, as is the case now. Under the existing framework, oil and gas producers are free to decide whether or not to share profits with the state before recovering their full investments depending on the bids they made to win the block. Also, the ratio for sharing profits with the state before and after full cost recovery is based on the bids made at the auction. This necessitates a "a close scrutiny of costs" as there is incentive for contractors to book costs that do not reflect the true economic cost, the panel said.

"The existing cost recovery system is causing all sorts of problems. This arrangement has led to disputes and delays in projects. We want to move away from the present system," Rangarajan said here after the report was made public. The idea is to do away with the need for keeping a close watch over whether costs are being inflated using various means including transfer pricing.

... contd.

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